Beneficiary

Why do individuals forget about their financial planning? Will it magically fix itself? Don’t let this happen to you and your family.
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A retirement plan participant can designate a beneficiary other than a spouse, but a waiver is required. Many plans have specific provisions that provide for the order in which distributions will be made in the event a specific beneficiary is not designated. For plan administrators, the rules about beneficiary designations require strict adherence to the plan documents, which can mean that those who think they have a right to benefits may not in fact have those rights and that leads to litigation.Such was the case in Herring v. Campbell, a recent case decided by the Fifth Circuit Court of Appeals. In this case, a plan participant designated his wife as his primary beneficiary with no secondary beneficiary. His wife died before he did, but he made no other beneficiary designation. When he died, the plan distributed his account balance in accordance with the plan rules, to his surviving siblings. Of course, he happened to have step-children, who sued the plan administrator for not giving them the money. The plan rules provided that in the absence of a beneficiary designation, surviving children get a the distribution before the deceased participant’s siblings.

The Court upheld the plan administrator’s interpretation of the definition of “children” to mean biological or legally adopted children. Step-children did not meet this definition so they were not entitled to the benefits. The step-children argued that they had been “equitably adopted” but the Court found that this concept applies only to those seeking to require a parent to recognize a child, not a benefit plan making distributions. So in the end, the Court decided that the plan had properly distributed the benefits to the siblings and excluded the step-children.

So when considering the distribution of benefits from a participant’s account, the participant certainly can designate step-children as beneficiaries by an affirmative designation. And step-children can become “children” through adoption, which would give them “child” status when considering plan distribution rules. But, as we see in this case, unless a “child” clearly satisfies the plan’s definition of beneficiary (that is if they are in fact children under the definition of the plan), they will not be entitled to a distribution as a beneficiary.

Regulations are changing everyday. Individuals need to review their beneficiary designations regularly. This should occur automatically when a life changing event happens. Remember some vehicles over
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ride your will.

A beneficiary designation form provides important estate planning for what may be one of an individual’s most valuable financial asset. One must be completed for each of an individual’s retirement accounts, and reviewed and updated at least once per year or whenever there are life changing events that affect the beneficiaries. If the beneficiary is a charity or other non-person, a verification process must be used to make sure it is still in existence and in good standing.Custodians and plan administrators usually want to do the right thing, and presenting a beneficiary designation form in a manner that is consistent with their operational requirements, policies, and procedures will help them to do just that. Bear in mind that the individuals handling the designation forms are usually customer service associates with no legal background. Therefore, where possible, the designation should be as straightforward as possible. The more sophisticated designations should be submitted to the firm’s legal department for review and approval.

The Spouse Is the Automatic Beneficiary for Married PeopleA federal law, the Employee Retirement Income Security Act (ERISA), governs most pensions and retirement accounts. Under ERISA, if the owner of a retirement account is married when he or she dies, his or her spouse is automatically entitled to receive 50 percent of the money, regardless of what the beneficiary designation says.

If another person is the designated beneficiary, the spouse will receive 50 percent of the assets and the designated beneficiary will receive the other 50 percent. A spouse always receives half the assets of an ERISA-governed account unless he or she has completed a Spousal Waiver and another person or entity (such as an estate or trust) is listed as a beneficiary.

A spouse can forgo his or her right to 50 percent of the account by properly executing a Spousal Waiver. However, generally a Spousal Waiver is not permissible under ERISA unless the spouse is at least 35 years old, depending on the type of retirement plan.

These rules can cause problems when the owner of a retirement account remarries. Often, the owner will change his or her beneficiary designation upon divorce and name the children as the designated beneficiaries. If the owner later remarries, though, 50 percent of the retirement assets will go to the new spouse instead of the children, even if the new spouse is not added as a beneficiary.

If the owner of a 401k is single when he or she dies, the assets go to the designated beneficiary, no matter what his or her will states. In addition, the assets will be distributed to the designated beneficiary regardless of any other agreements — even court orders.

For example, assume a man’s wife is the designated beneficiary of his 401k. The couple gets divorced and the man does not change his beneficiary designation, but the woman waives her right to receive any retirement assets as part of the divorce agreement. If the man dies without changing his beneficiary designation and without remarrying, his former wife will still receive the retirement assets, even though the divorce decrees declares that she should not.